Investing Beyond the Hype Cycle

Tech investment winners get out before the hype peaks or don't get in until it has cooled.

NEW YORK ( TheStreet) -- Almost two decades ago, the Gartner Group created a graphic called the "hype cycle" to explain its own behavior, and that of other analysts.

The graph looks like a hill followed by a slope. The hill shows a new technology's potential being hyped well beyond its capability, then falling precipitously and gradually picking up momentum toward its true potential.

Internet investors saw a long hype cycle, lasting right until the Time Warner-AOL merger in January 2000. The fall was profound, but some companies from that era including Priceline.com ( PCLN) and Amazon.com ( AMZN), are bigger than they ever were. GOOG ( GOOG) barely existed when the hype ended.

Social investing went through a hype cycle, but the cycle crashed before the investing public was invited to the party. That's why the Facebook ( FB) IPO was such a disaster. The flood of stock was a "Time-AOL" event for the space. The bubble popped. But that doesn't mean there was no "there" there. There was. How much, we'll find out.

The 3-D printing market has just gone through its own hype cycle. The space looked like a big winner last year, but if you got into the leading stocks -- 3D Systems ( DDD) or Stratasys ( SSYS) -- three months ago you caught a top. Both are down about 20% from early January.

What the hype cycle really means for investors is that if you get in early, you have to be prepared for a hard fall. Those who get into the cycle, don't fall in love with the space, and get out quickly, like Mark Cuban did with Broadcast.com in the 1990s, can come out billionaires. Those who don't, like David Weatherell of CMGI, now ModusLink ( MLNK), can lose billions.

Since Gartner came up with its chart I've seen countless hype cycles. There was a broadband boom, there was hype around the Internet of Things, there was a health IT boom and one around open source. In each case there was something real, but nothing like what the hype promised. In some cases the hope has yet to be realized.